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The universal postal service is financially sustainable, Ofcom reports today, while current rules and safeguards for people and businesses who use post are generally working well.

Under the universal service, Royal Mail must deliver to every address in the UK, six days a week, at a uniform price. The service is highly valued by postal consumers,1 and its terms are protected by Parliamentary law.

After a review of the postal market,2 Ofcom has today found that:

• Royal Mail’s current return on sales is at the lower end of the 5-10% range which Ofcom considers to be compatible with a sustainable universal service. Until 2014/15, Royal Mail’s return on sales was below this range, although it had been improving since 2010/11.
• Royal Mail has made notable modernisation improvements, but it could still do more to improve efficiency in the interests of postal users. Royal Mail’s delivery offices have variable efficiency, and the company has scope to target the lower-performing depots.3
• Consumer satisfaction with postal services, and value for money, are high.
• There has been increased competition and innovation in the parcels sector. Royal Mail has retained its strong position in the delivery of small, individual parcels.

Given the declining letters market, and increased competition in parcels, Ofcom is not proposing to impose new price controls on Royal Mail’s wholesale or retail products.

As the postal regulator, Ofcom has duties to secure the universal service, and ensure it remains efficient. The service had been under significant financial pressure after years of falling letter volumes, and was making a loss of more than £100m in 2011.

These concerns prompted Ofcom to introduce a new framework for postal regulation in 2012, with greater commercial freedom for Royal Mail - alongside a safeguard cap on stamp prices to protect vulnerable consumers. Ofcom is today proposing to leave this framework, and the safeguard cap, in place.

Protecting untracked letters

All postal operators who deliver ‘untracked’ letters - such as medical letters, bank statements and birthday cards - must minimise the risk of loss, theft, or damage, under plans in today’s consultation.

Untracked letters may be very important to protect, and valuable to the recipient - even though they rarely contain items with a high face value, which are more often sent using a tracking service.

Examples of untracked letters range from credit card bills to hospital appointments, or exam results. Untracked letters are also more likely to go missing, because the recipient may not be expecting to receive anything.

Ofcom already sets rules for looking after mail - including how postal companies must recruit and train staff, ensure the security of mail and report serious incidents to the regulator.

Today's proposals would require postal operators to focus on ensuring letters4 arrive safely. Ofcom intends to introduce new rules to clarify how postal operators must look after these items - shifting the focus of regulation away from logistical and procedural requirements, towards assessing postal operators’ actual performance. Those who fail to meet the new rules would face fines.

Jonathan Oxley, Ofcom Competition Director, said: "Consumers should have utmost confidence in using postal services. We want to ensure that letters which haven't been tracked, but may still contain important contents, arrive safely."

New rules for Royal Mail and postal operators

Ofcom’s review demonstrates strong competition in the ‘access’ market - where rival operators collect and sort mail before handing it over to Royal Mail to complete delivery - with access mail representing about 56% of all letters in the UK.

However, Ofcom is proposing to tighten some rules in this area. First, to stop shorter notice periods around contractual terms being imposed by Royal Mail on access operators. Second, to respond within six weeks when a wholesale customer requests a product similar to one already sold by Royal Mail.

Ofcom is also concerned that Royal Mail has the potential to cross-subsidise its parcels business through its letters business - where it has a much larger market share and an established delivery network - in a way that might disadvantage other parcel operators.

So Ofcom will closely monitor whether Royal Mail is appropriately allocating its costs between parcels and letters.

Next steps

Today’s consultation on the Review of the Regulation of Royal Mail closes on 3 August 2016. Ofcom expects to publish a statement on its final decisions later this year.

Ofcom will continue to monitor the postal market closely, and intervene where necessary to protect the universal postal service.

NOTES TO EDITORS

1. On the value of the universal service to users, see Ofcom's previous Review of Postal Users' Needs.
2. Ofcom’s review was announced last year, after Royal Mail’s competitor Whistl announced that it was withdrawing from the market for direct delivery - where an operator collects, sorts and delivers bulk mail entirely using its own network. This left Royal Mail without any national competition for direct delivery of letters.
3. According to Ofcom’s analysis, if Royal Mail increased the average efficiency of its 1,400 sorting offices to match that of its best-performing 10%, the company could increase the overall efficiency of its offices by 10%.
4. This will apply to letters and large letters. Large letter means any item larger than a Letter and up to length 353mm, width 250mm, thickness 25mm, and weighing no more than 750g.
5. Separately to the Review of the Regulation of Royal Mail, Ofcom is investigating whether Royal Mail has abused a dominant position in contravention of the Competition Act 1998, by virtue of the access prices that it announced in November 2013 and January 2014. This investigation followed a complaint by TNT Post UK (now Whistl). In July 2015, Ofcom issued a Statement of Objections to Royal Mail, setting out Ofcom’s provisional view that Royal Mail had breached competition law by engaging in conduct that amounted to unlawful discrimination against postal operators competing with Royal Mail in delivery. Ofcom expects to make a final decision later this year.